Question

Given the following data, you would like to estimate what the return on Amazon stock could be given its beta of 1.63 (as of October, 2019). Other data you have collected: the rate of return on 90 day T-Bills is 1.93%, on 5 year T-Notes it 3% and on the "long bond", the 30-year T- Bond = 3.5%. The Prime is 7%, LIBOR is 6.5% and the average return on the overall stock market is estimated to be 12%.

OK again, what do you expect the rate of return on Amazon's stock to be?

Answer 1

1.63

The rate for T-Bill only since the treasury bill is always a risk free investment since the governmnet can't default payment of bond when they mature. The interest rate on 3 months or 90 days T-bill is risk free interest rate.

Risk free rate = T- Bill Rate of return = 1.93%

Return of stock in market = 12%

Expected Rate of return on Amazon stock (ER_A)

expected return by Capital Assets Pricing Model (CAPM)

= 1.93 + 1.63(12 - 1.93)

= 1.93 + 1.63 * 10.07

= 1.93 + 16.41

= 18.34

Expected Rate of Return on Amazon stock = 18.34%